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International Trade

a new, dominant market. The United States, for example, control their governments through trade. Self-sufficiency
was the dominant world manufacturer from the end of allowed the Soviet Union and its allies to avoid that pos-
World War II (1939–1945) until the early 1970s. But, sibility. These self-imposed trade restrictions, however,
beginning in the 1970s, other countries started to produce created a shortage of products that could not be produced
finished products more cheaply and efficiently than the among the group, making the overall quality of life within
United States, causing U.S. manufacturing output and the Soviet bloc substantially lower than in the West since
exports to drop significantly. Rapid growth in computer consumer demand could not be met. When the Berlin
technology, however, began to provide a major export for Wall came down, trade with the West was resumed, and
the United States. Practically speaking, the United States the shortage of products was reduced or eliminated.
has been slowly transformed from a manufacturing-based
economy into a new information age-based economy that
ECONOMIC ENVIRONMENT
relies on exporting cutting-edge technology, as high-tech
An important factor influencing international trade is
software and computer companies proliferate.
taxes. Of the different taxes that can be applied to
imported goods, the most common is a tariff, which is
POLITICAL ENVIRONMENT generally defined as an excise tax imposed on imported
Each country varies regarding international trade and goods. A country can have several reasons for imposing a
relocation of foreign plants on its native soil. Some coun- tariff. For example, a revenue tariff may be applied to an
tries openly court foreign companies and encourage them imported product that is also produced domestically. The
to invest in their country by offering reduced taxes or primary reason for this type of tariff is to generate revenue
some other investment incentives. Other countries impose that can be used later by the government for a variety of
strict regulations that can cause large companies to leave purposes. This tariff is normally set at a low level and is
and open a plant in a country that provides more favor- not usually considered a threat to international trade.
able operating conditions. When a company decides to When domestic manufacturers in a particular industry are
conduct business in another country, it should also con- at a disadvantage, vis-à-vis imports, the government can
sider the political stability of the host country’s govern- impose what is called a protective tariff. This type of tar-
ment. Unstable leadership can create significant problems iff is designed to make foreign products more expensive
in recouping profits if the government of the host country than domestic products and, as a result, protect domestic
falls or changes its policy toward foreign trade and invest- companies. A protective tariff is normally very popular
ment. Political instability is often caused by severe eco- with the affected domestic companies and their workers
nomic conditions that result in civil unrest. because they benefit the most directly from it.
Another key aspect of international trade is paying In retaliation, a country that is affected by a protec-
for a product in a foreign currency. This practice can cre- tive tariff will frequently enact a tariff of its own on a
ate potential problems for a company, since any currency product from the original tariff-enacting country. In
is subject to price fluctuation. A company could lose 1930, for example, the U.S. Congress passed the Hawley-
money if the value of the foreign currency is reduced Smoot Tariff Act, which provided the means for placing
before it can be exchanged into the desired currency. protective tariffs on imports. The United States imposed
Another issue regarding currency is that some nations do this protective tariff on a wide variety of products in an
not have the necessary cash. Instead, they engage in coun- attempt to help protect domestic producers from foreign
tertrade, which involves the direct or indirect exchange of competition. This legislation was very popular in the
goods for other goods instead of for cash. Countertrade United States, because the Great Depression had just
follows the same principles as bartering, a practice that begun, and the tariff was seen as helping U.S. workers.
stretches back into prehistory. A car company might trade The tariff, however, caused immediate retaliation by other
new cars to a foreign government in exchange for high- countries, which imposed protective tariffs of their own
quality steel that would be more costly to buy on the open on U.S. products. As a result of these protective tariffs,
market. The company can then use the steel to produce world trade was severely reduced for nearly all countries,
new cars for sale. causing the wealth of each affected nation to drop, and
In a more extreme case, some countries do not want increasing unemployment in most countries.
to engage in free trade with other nations, a choice known Realizing that the 1930 tariffs were a mistake, Con-
as self-sufficiency. There are many reasons for this choice, gress took corrective action by passing the Reciprocal
but the most important is the existence of strong political Trade Agreements Act of 1934, which empowered the
beliefs. For example, the Soviet Union and its communist president to reduce tariffs by 50 percent on goods from
allies traded only with each other because the Soviet any other country that would agree to similar tariff reduc-
Union feared that Western countries would attempt to tions. The goal was to promote more international trade

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